CHAPTER 1 AN INVESTMENT PERSPECTIVE OF HUMAN RESOURCE

CHAPTER 1 AN INVESTMENT PERSPECTIVE OF HUMAN RESOURCE MANAGEMENT Power. Point Presentation by Charlie Cook Copyright © 2002 South-Western. All rights reserved

The Strategic View of Human Resources n n n Employees are human assets that increase in value to the organization and the marketplace when investments of appropriate policies and programs are applied. Effective organizations recognize that their employees do have value, much as same as the organization’s physical and capital assets have value. Employees are a valuable source of sustainable competitive advantage.

Sources of Sustainable Competitive Advantage n n Valuable to the firm in that it exploits weaknesses or neutralizes threats Must be rare among competitors Must be difficult for competitors to imitate Must not be easily substitutable

The New Competitive Environment n n n Shortened product lifecycles Erosion of patent protection Decreased regulation and protected markets Increased access to capital markets Increasing importance of innovation, both process and product n HR is a key lever in addressing these challenges!

HR & Competitive Advantage n n The International Motor Vehicle Study, a worldwide research study of the automobile industry conducted at MIT showed that people-centered practices were associated with almost twice the productivity and quality as conventional mass production. Similar studies in steel, apparel, and semiconductors, sponsored by the Alfred P. Sloan Foundation, reveal similar positive effects for people-centered practices.

HR CHOICES: FUNCTIONAL n n n Individual work v. team work Pay for job v. pay for individual v. pay for group v. pay for need Make or buy skills Promote form within v. recruit at all levels Job security v. no commitments

HR CHOICES: PHILOSOPHY n n Motivate by money v. peers v. the work Egalitarianism v. meritocracy Assume shirking v. assume inherent desire to do good work Centralized v. decentralized control

WHY DIFFERENT CHOICES ARE MADE

Investment Orientation

The Investment-Oriented Organization n Organizational Characteristics n n n Sees people as central to its mission/strategy. Has a mission statement and strategic objectives that espouse the value of human assets in achieving goals. Has a management philosophy that encourages the development and retention of human assets and does not treat or regard human assets in the same ways as physical assets.

Investment Orientation Factors n Senior Management Values and Actions n n Attitude Toward Risk n n An organization’s willingness to invest in its human resources is determined by the “investment orientation” of its managers. Investment in human resources is inherently riskier due to lack of absolute “ownership” of the asset. Nature of Skills Needed by Employees n The more likely that skills developed by employees are marketable outside the firm, the more risky the firm’s investment in the development of those skills.

Investment Orientation Factors n Utilitarian (“Bottom Line”) Mentality n n n An attempt is made to quantify employee worth to the organization through a cost-benefit analysis. The “soft” benefits of HR programs and polices are difficult to objectively quantify because they affect many different organizational areas and have differential effects on individual employees. Availability of Outsourcing n If cost-effective outsourcing is available, investments will be made only in HR activities producing the highest returns and largest sustainable competitive advantages.

Case Discussion Southwest Airlines

Southwest Airlines

Southwest Airlines n n n Only major airline to have earned a profit every year for nearly three decades. Southwest has won the Triple Crown (best on time performance, fewest complaints, fewest lost bags) for 5 years in a row. No other airline has won this award. Southwest’s operating costs are 20% below the industry average. Company is 84% unionized. Now serves over 52 cities with 26, 000 employees. In 1998 they had over 140, 000 job applicants.

Three Questions: n n n What does it take to make money in Southwest’s business? What are Southwest’s sources of competitive advantage? Are they sustainable? How serious is the threat of competition? Can other airlines copy the Southwest model? How? What are your concerns? What does Southwest need to do to continue their success?

Southwest Airlines n n Talking about Southwest’s recruiting. Kelleher says, “We draft great attitudes. If you don’t have a good attitude, we don’t want you, no matter how skilled you are. ” What are your reactions to this approach?

Mission Statement n n “The mission of Southwest Airlines is dedicated to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit. ” Does this matter at Southwest? Why?

To Our Employees: n “We are committed to provide our employees a stable work environment with equal opportunity for learning and personal growth. Creativity and innovation are encouraged for improving the effectiveness of Southwest Airlines. Above all, employees will be provided the same concern, respect, and caring attitude within the organization that they are expected to share externally with every Southwest Customer. ”

“Every company I have ever gone in, they say people are number one, but they’re just not. They don’t live up to that, and we do. ” Gary Kelly Chief Financial Officer Southwest Airline

Airline Performance, January 1999 Complaints On-time Lost bags Percent Per 1000 Southwest 76. 7% - 1 5. 70 - 3 per 100, 000 0. 40 - 1 Continental Delta American West American Alaska United Northwest TWA USAir 72. 0% - 2 71. 4% - 3 68. 3% - 4 67. 1% - 5 66. 5% - 6 66. 5% - 7 62. 7% - 8 60. 0% - 9 58. 2% - 10 8. 49 - 6 7. 63 - 5 5. 21 - 1 7. 20 - 4 8. 87 - 7 11. 3 - 9 10. 3 - 8 12. 0 - 10 5. 37 - 2 1. 46 - 3 1. 52 - 4 3. 21 - 8 2. 12 - 8 1. 34 - 2 1. 92 - 5 3. 89 - 10 3. 88 - 9 3. 06 - 7

Southwest Takeaways n n A simple, consistent strategy Aligned and consistent HR practices n Long-term perspective on employment n n n Stability Job design Training and development Careers Compensation n Performance-based Ownership Compressed wages

Southwest Takeaways n n n Selection for “attitude” and “fit” Strong culture --family, performance Leadership reinforcement Information sharing Psychological Ownership

Reading 1. 1: The SWA Value Cycle Value at Southwest Airlines is: 1. Created through satisfaction of employee needs. SWA management acts to fulfill employee needs (monetary and non-monetary) as a means of creating value which can ultimately be converted to organizational uses. 2. Converted to customer and share holder value via organizational capabilities (the design of specific operating processes). 3. Captured by SWA as competitive advantage through lower costs and superior service (productivity) in relation to its competitors.

Reading 1. 1: The SWA Value Cycle The airlines’ competitive advantage, achieved in how it manages its workforce, can not be readily imitated by it competitors for two reasons. n people management systems are not visible or tangible neffective human resource management practice involves having different functions working in tandem as a system

Reading 1. 1: The SWA Value Cycle Management Implications: n Both aspects of strategy (e. g. , low-price, highservice) must be in harmony to create and sustain internally derived competitive advantage. n Harmony among operating processes, organizational culture, and HR practices reinforce one another in the creation and conversion of value. n HR’s ability to achieve and maintain of competitive advantage

Reading 1. 1: The SWA Value Cycle Management Implications (cont’d): n While competitive advantage through people is difficult to achieve and hard to sustain, it is also not easy to duplicate (imitate). n HR and line managers are responsible to identify which tools will be most effective in their organization’s effort to create value for employees. n HR is implemented by everyone in the organization.

Reading 1. 2: Effective HRM Practices n n n n Employment Security Selectivity in Recruiting High Wages Incentive pay Employee Ownership Information Sharing Participation & Ownership Self-Managed Teams n n n n Training & Development Cross-Utilization & Cross -Training Symbolic Egalitarianism Wage Compression Promotion From Within Taking the Long View Measurement of Practice Overall Philosophy